Citizen, Regulate Thyself!

There are many arguments against self-regulating bodies. But getting rid of them won’t be easy.

Hum ko ma.alūm hai bazaarkī haqīqat lekin
Sab ka dil bahlaneko ‘self-regulation’ ye ḳhayāl achchhā hai

“We know the realities of the marketplace, but to keep everybody happy the idea of self-regulation is a good one” – with apologies to Mirza Ghalib.

A few weeks ago, the Ministry of Finance announced that a National Financial Regulation Authority (NFRA) would be set up to oversee the quality of financial reporting and audit of companies. The proposed NFRA would not have practising chartered accountants on it. It would have concurrent jurisdiction with the Institute of Chartered Accountants of India (ICAI). Meanwhile, a draft bill under discussion at the Lok Sabha recommends setting up of a National Medical Commission (NMC) that would regulate, apart from education and licensing, the practice of medical profession. The NMC is proposed to include persons other than from the medical profession (although minimally) while simultaneously dissolving the Medical Council of India that is currently manned only by doctors and responsible for regulating the medical profession. The Law Commission Report No. 266 on the legal profession in 2017 recommended that non-lawyers be inducted into disciplinary committees that look into complaints of misconduct against advocates.

One would be tempted to think that the days of self-regulation of professions in India are numbered. India is not an outlier in the fight against self-regulation of professions. Scholars have traced the decline of self-regulation in large western economies over the last 30 years. Self-regulation essentially involves a special group negotiating with the State to delegate or give up its regulating power to them, by promising a certain quality of services that are essential to the functioning of the society. The State agrees, keeping in view the value to the public that the group renders. It is not a coincidence that the three instances we noted above are professions engaged in the fundamental functions of a State – health, justice and taxation. It is also not surprising that these profession derive their value from significant information asymmetries that the State has created to a large extent – interpreting complex laws (lawyers and accountants), guiding through complex procedures (lawyers and accountants) and State failure (health services).

Free market advocates have long derided the entry barriers that such groups have presented. Voices from the other end of the spectrum have called out the capture of the regulations by the special interest groups. For example, while lawyers are fighting against the entry of foreign law firms, the Supreme Court has asked a committee to look into the nature of operations of foreign accounting firms in India. In most cases, the professional body controls the full life-cycle of the profession – from conditions for entry (syllabus, examinations, educational institutions), conduct during practice (ethics and procedure for deciding what is misconduct) and removing an individual from the profession (debarring). The failure of professional bodies to mitigate misconduct and punish erring professionals has resulted, in many countries, in the erosion of public trust in such institutions.

All of these self-regulating professions rely heavily on a code of conduct or ethics to regulate the day-to-day practice. However, any code of conduct is only as good as its implementation. When demand-supply factors are at play, in the absence of robust enforcement mechanisms, it is but natural that the code is followed in the exception. Interests of the profession and that of the public are increasingly being seen as antithetical. As a consequence, the public and State are finding it necessary to become involved in running these professions.

So far, the solutions put forward in India are typical of an interventionist state – public officials are getting a seat at the table or in some cases, sitting at the head of the table. Given the track record of public institutions in India, that is not something to feel optimistic about. In the case of the NMC, its various functions (education, examination, practice) have been sought to be broken up and given to different bodies. This may be something that should be looked into for other professions as well. But there are other measures that can be explored.

Given the vast variety of services, professionals and service recipients in the market, it is necessary to differentiate between them and regulate accordingly. While the standards of professional conduct would be similar across the board, some types of service-providers or services that are important to public interest will need to be held to a higher standard. Some examples of these are lawyers advising or handling disadvantaged groups, auditors of public sector undertakings/banks and so on. It is easy to see this as over-regulation that would lead to scarcity of service providers and consequent higher prices. But this would be mitigated by the high number of professionals in India. Differentiating between services too is necessary. For example, while the audit and certification functions of chartered accountants have received a lot of attention, their role in advising on tax and compliance has not. Many European countries regulate tax advisors differently given their importance to public revenue. Similarly, we need to ask whether neurosurgeons should be held to the same standards as general physicians.

Given the information asymmetry and imbalance between professionals and many service recipients, a standard contract that would provide for disclosures and levels of conduct could be mandated. One could argue that the codes of conduct are exactly that. But by pushing these down to the individual-contract level, the service-recipient is being involved in drawing up the terms and conditions that she will hold the professional accountable to. It might also be worth exploring the setting up of exclusive tribunals / arbitration centres to deal with cases of professional misconduct and granting relief to the aggrieved service recipients. This would inspire confidence in pursuing disputes against professionals (as compared with approaching in-house disciplinary committees or courts, where delays are rampant) as well as act as a deterrent to professionals tempted to cross the line.

In spite of all the momentum gained in the last few years, it is still too early to talk of the end of self-regulation of professions in India. In spite of the recommendations of the Law Commission Report and the low public perception of the legal profession in general, concrete action on the ground has not been taken. They are firmly entrenched in the political economy and we should expect to see a strong pushback to these tentative first steps.

Hopefully it will not be, as Ghalib says, a lifetime before there is any impact (‘ek umr asar hone tak’) even to these.

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About the author

Surya Prakash B S

Surya Prakash B .S. , a Chartered Accountant and law graduate, is Programme Director at DAKSH, Bengaluru, a civil society organisation working on judicial reforms. His research interests include judicial management, administration, technology and tax.